We analyze the impact of CDS introduction on real decision-making within the firm, taking into account differences in the local economic and legal environment of firms. We extend the model of Bolton and Oehmke (2011) in order to consider uncertainty in whether actions taken by the reference entity will trigger CDS obligations.
We examine the relation between high frequency quotation and the behavior of stock prices between 2009 and 2011 for the full cross section of securities in the US. On average, higher quotation activity is associated with price series that more closely resemble a random walk, and significantly lower cost of trading.
We propose a novel method of estimating default probabilities using equity option data. The resulting default probabilities are highly correlated with estimates of default probabilities extracted from CDS spreads, which assume constant recovery rates. Additionally, the option implied default probabilities are higher in bad economic times and for ﬁrms with poorer credit ratings and ﬁnancial positions.
We use a sample of option prices, and the method of Bakshi, Kapadia and Madan (2003), to estimate the ex ante higher moments of the underlying individual securities’ risk-neutral returns distribution.